Real Estate Linked to the Small Business Credit Crunch

Real Estate Linked to the Small Business Credit Crunch

Wednesday, March 10,2010 05:56 PM

It's no secret that small businesses in the U.S. face difficulties accessing credit. According to a survey of a random sample of 751 small businesses conducted by Gallup at the end of 2009 for the National Federation of Independent Business Research Foundation, 44% of small businesses seeking credit in 2009 received only some or none of the money they sought. This level of credit access compares poorly with mid-2000, when nine of every 10 companies seeking credit received it.

While there is broad agreement that a small business credit problem exists, there is less consensus about its causes. As a result, formulating viable solutions has proved difficult.

Although many factors are contributing to current credit problems, one that is under-appreciated is the degree to which small business credit is linked to difficulties in the commercial and residential real estate markets.

Falling real estate prices impinge on the ability of small employers to borrow the money they need to fund their operations because small businesses use real estate to obtain credit in a variety of ways. According to the NFIB study, 21% of small employers have mortgaged real estate for business purposes and 11% use real estate as collateral for other business assets.

Moreover, according to the NFIB, during the period of easy credit, some small business owners obtained loans by using real estate whose value turned out to be inflated. As a result, the owners were able to borrow more than their credit, and perhaps their businesses, could support. When real estate prices fell, the value of the collateral pledged against these loans dropped, and some these loans could no longer be supported. In fact, 13% of small business owners have a property that is under water, according to the NFIB survey.

Falling real estate prices also have weakened small business balance sheets and made them less creditworthy borrowers. Lenders have responded to the worsened financials by cutting back on credit to small businesses. Thus, even when small businesses seek loans to pursue promising business opportunities, their weakened balance sheets mean fewer of them can borrow than when credit was easier.

Read the rest of this article here: http://www.businessweek.com/smallbiz/content/mar2010/sb2010034_069601.htm